News Analysis

James Tobin, Adviser to Kennedy, Dies at 84Holcomb B. Noble

March 13, 2002

Dr. James Tobin, a professor emeritus of economics at Yale who was a top adviser in the Kennedy administration and received the Nobel Prize in economics in 1981, died on Monday in New Haven. He was 84 and lived in New Haven.

The cause was a stroke, a Yale spokeswoman, Dorie Baker, said. Dr. Tobin was known for applying economic theory to the way people made decisions and for advocating the Keynesian theory of government intervention in the economy.

Throughout his career, he battled conservative economists like Milton Friedman, a Nobel laureate at the University of Chicago, who disdained government intervention. Dr. Tobin regarded his Nobel Prize as a vote of confidence in the Keynesian theory.

Paul A. Samuelson, a professor emeritus at the Massachusetts Institute of Technology, called Dr. Tobin “the leading macroeconomist of our generation.”A macroeconomist studies the way an economic system performs, with particular attention to the vagaries of budgetary and monetary policies. Dr. Tobin also made significant contributions to the understanding of international financial markets, statistical methods and the study of spending decisions by households and businesses.

The Nobel selection committee called his work a breakthrough in analyzing the relationship of financial markets, including those for stocks and bonds, with “real” markets, like those for real estate, factory machinery and consumer goods. Describing this relationship, the committee said, had been a “classic problem in economic research.” Dr. Tobin concluded that investors were affected by their assessments of how risky their decisions might be and that they differed in the amount of risk they were willing to take. He explored the tendency to build portfolios in which risks were balanced against more secure assets. Earlier analyses frequently oversimplified the behavior, assuming that investors typically sought the highest return without regard to risk.

But Dr. Tobin’s work, known as the Portfolio Selection Theory, helped increase the understanding of an investor’s willingness to hold various assets. During times of inflation, for instance, he found them less willing to hold stock or cash, turning instead to bonds or physical assets like real estate.

After he won the Nobel Prize, reporters asked him to explain the portfolio theory. When he tried to do so, one journalist interrupted, “Oh, no, please explain it in lay language.” So he described the theory of diversification by saying: “You know, don’t put your eggs in one basket.” Headline writers around the world the next day created some version of “Economist Wins Nobel for Saying, `Don’t Put Eggs in One Basket.’ ”

Another theory, important to investors as well as to policy makers, was called Tobin’s Q. This ratio measures the relationship of the market value of factories or other corporate assets to their replacement cost. When replacement costs run high, Tobin’s Q runs low, and in those situations, companies tend to expand by acquiring other companies instead of building plants or buying equipment.

The theory gained prominence at the height of the market boom in the late 1990’s, when researchers noted that the overall value of Tobin’s Q in the market looked unreasonably high relative to historical norms. Some economists argued that such a discrepancy would be followed by a sharp decline, which soon arrived.

When President John F. Kennedy asked him in 1961 to join the Council of Economic Advisers, Dr. Tobin had spent little time in government and politics, confining himself to teaching and research first at Harvard and, since 1950, at Yale.

As things turned out, in the view of his colleagues, Dr. Tobin brought to government the same independence of mind and intellectual rigor that he brought to research. He helped engineer a tax cut, not enacted until after Mr. Kennedy’s death, that many politicians have cited as one of the most successful government efforts to revive a halting economy.

James Tobin was born on March 5, 1918, in Champaign, Ill., the son of Louis M. Tobin, a journalist, and Margaret Edgerton Tobin, a social worker. As an undergraduate at Harvard in the 1930’s, he was taught economics by Joseph A. Schumpeter, Wassily Leontief, Seymour Harris, Alvin Hansen and other members of a department that has become legendary.

He was attracted to economics because he felt a need to understand the Depression and was intrigued by the economic discussion over what should be done about unemployment and other problems, a classic debate between the hands-off theory of Adam Smith and the intervention theory of John Maynard Keynes.

Dr. Tobin graduated summa cum laude in 1939 and earned his master’s degree the next year. After a wartime interruption to serve one year in the federal government and four years in the Navy, he returned to Harvard to earn a Ph.D. in 1947.In the Navy, he received officer training at Columbia University in the same class with Cyrus R. Vance, who later became secretary of state, and Herman Wouk, who later wrote “The Caine Mutiny.” In that novel, Dr. Tobin was the inspiration for a midshipman named Tobit, described by Mr. Wouk as “ahead of the field by a spacious percentage.” The appearance in the novel “was my greatest claim to fame, until today,” he joked 40 years later, on the day he won the Nobel Prize. By that time, Tobit had become the name of a statistical technique Dr. Tobin devised for analyzing data with maximum or minimum values. For instance, Tobit can accurately parse out how factors like age and income influence individual decisions about how much to contribute to individual retirement accounts.

In his undergraduate honors thesis, he found some fault with Keynesian logic, though he generally gave enthusiastic support to its principal doctrine. In his thesis he explored an issue that would intrigue him his entire career: Should the government intervene in a free-market economy and, if so, to what extent?
Dr. Tobin maintained that Keynes had been right in arguing that the economy needed help on occasion in solving problems like severe unemployment and poverty, but that he went further than necessary.

In an interview in 1996, Dr. Tobin described some of his research as an effort to “fix up some of the implausibilities in Keynesian economics and to make more sense of it.” He said, “There has been justified criticism of the Keynesian model, that it was too Depression-oriented.” Dr. Tobin also formalized the idea of a tax on international transactions, which he asserted could enhance financial stability and prevent flash currency crises, like those that affected Southeast Asia in the late 1990’s. The “Tobin tax” found support among fellow economists including Lawrence H. Summers, before Mr. Summers joined the World Bank and the Treasury Department. After the Asian crisis, many advocates for developing countries revived the proposal.Dr. Tobin served on the Council of Economic Advisers with Kenneth J. Arrow and Robert M. Solow, who both went on to win Nobel Prizes in economics.

“The Kennedy council was effective,” Dr. Tobin said, “because the president and his immediate White House staff took academics seriously.” He served on the council under Mr. Kennedy and for less than a year under President Lyndon B. Johnson, when he returned to Yale. “Fifteen- hour days and seven-day weeks were a hardship for me, my wife and our four young children,” he said. Back at Yale, he studied the economically disadvantaged and the inadequacies and inefficiencies of federal and state welfare programs. During the 1972 presidential race, Dr. Tobin helped develop for the campaign of Senator George McGovern what was called the negative income tax, a modest income payment to those below the poverty line. But he said Mr. McGovern and his staff botched its presentation in the heat of the California primary and voters thought the proposal was “a kooky budget-breaking handout.”

A scaled-down version of such an income transfer to the poor was later enacted into law in the first Bush administration, but it was eliminated by President Bill Clinton. Dr. Tobin acknowledged that some Great Society ideas of the 60’s were too optimistic about what government could accomplish. But he said in a 1996 interview that “many of the benefit programs, like food stamps, are credited by their opponents as well as their supporters with having essentially brought poverty as conservatively defined by the federal government, down close to zero.” He retired as a faculty member in 1988 at age 70 but continued teaching as professor emeritus. Dr. Tobin was the author of some 500 articles and 16 books. He is survived by his wife of 55 years, the former Elizabeth Fay Ringo; a daughter, Margaret Ringo Segall, of New York; three sons, Louis Michael, of Madison, Wis.; Hugh Ringo, of Seattle; and Roger Gill, of Belmont, Mass.; a brother, Roger Gill, of Venice, Fla.; and three grandchildren.